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View Full Version : Sole Proprietor - Equity and Draw??


JBailin
03-28-2003, 08:38 PM
Am a sole proprietor of small business...was co-mingling funds, and had all personal expenses listed as "Other Expenses". Accountant said to create an equity account and take a draw, to then pay for personal expenses. Can't find adequate explanation of how to set this up. I.E. if draw is an equity account....do I deposit draw (equity) into my personal checking account....and how are my personal expenses supposed to be tracked. Please Advise

bright_ideas
03-28-2003, 09:11 PM
Hi JBailin,

I am also a sole proprietor and I use an Owners Draw account. This is how I do it.

1, set up new account, type-equity, name-Owners Draw. Then whenever you make a withdrawal from your bank account for cash, or personal use, or to pay yourself, you just write a cheq and in the expense column put Owners Draw.

whenever you purchase something out of pocket, like picking up some paper at Staples or something, you open up your Owners draw account then manually enter it in. as an increase.

it does explain the set up really well in the help index.

royg
03-29-2003, 02:05 AM
Sandra's right. And once you separate the two (personal and company) be sure you record your personal money that you put into the business, as well. This can also go into your equity account.

It's really easy once you get into the swing. And your accountant should go over your equity account entries to make sure you aren't missing something that should stay in the business.

JBailin
03-29-2003, 09:41 AM
I understand writing a business check to me, with account name listed as "owners draw"...but how does that equate to the name of my personal checking account which I write checks out of...... how do I track that I deposited my draw into a checking account.

royg
03-29-2003, 11:29 AM
Hello, JBailin,

If you are asking "how do I record the check (written to me from the business account) as deposited into my personal account?" I believe the answer is "in a different company."

In other words, if you want to use Quickbooks to keep track of your personal expenses and income as well as your business expenses and income, you should set up a separate "company" that is your personal account.

Then when you write the check (recorded in "Owner's draw") from your business account, you would close your business books and open your personal account. Then you could show the money being deposited into your personal account.

The two accounts would have separate accounts, separate reports, etc., but there would be no confusion as to what was your personal income and expenses vs. your business income and expenses.

Hope this makes sense,

Roy

funpete2000
04-03-2003, 01:43 AM
This is basically what I have been doing - Now, If I put my personal finances on quicken, )an older version) I ass-u-me they can talk to each-other (for transfers, etc)?

Havn't really worked on this yet, so if this doesnt make sense, disregard.
Pete

JBailin
04-03-2003, 09:57 AM
Thanks Royg,

Your solution makes the most sense to me. and seems like the easiest and most logical solution. I think that my final hang up here is if I end up occassionally making business expenses from my "personal account" how should I record them in my business account so that I can have accurate monthly P&L statements...do I end up decreasing my owners draw when I do this.

Please advise.

Jill

retsaef
04-03-2003, 10:35 AM
I would also suggest a separate file for your personal checking account. But, if you don't why, couldn't you just have a checking account called "personal account". When you write a check, expense it to an account called "personal expenses", you could have as many personal expense sub accounts as you would like. When you run financial statements, simply filter your personal checking and expense account out.

JBailin
04-03-2003, 10:45 AM
that's the way I currectnly do it (all in one company)...but it goes back to the problem of all accounts will show up on the P&L statement...."if and when business is audited" IRS could look at all my personal information instead of just business

bright_ideas
04-03-2003, 11:29 AM
Hi JBailin,

If thats the way you do it then and you keep both accounts in one qb file (not recomended), then try using class tracking, have a class for Home and one for Work, then when you create your Profit and Loss statement, then you can modify, filter, class, select home to show all home income/expenses and work to show all work income/expenses.

This will keep home and work separate on your p&L, but it does not work well for Balance Sheets, and GL's and in the end that is where your accountant gets his information.

royg
04-03-2003, 01:09 PM
Hello, Jill

If you do pay for a business expense from your personal account then it should go into equity--just as if you (the owner) wrote a check to your business.

I have seen it done two ways: Some do as you suggested, decreasing your owner's draw account. Others set up a separate owner's equity account for "owner's investments in the business."

If you have an accountant, or if someone else does your taxes, check with them to see how they would prefer to see the equity accounts structured.

The big thing/principle is that you want to be able to take a quick look at your company's books and tell how many assets and liabilities are there.

Because equity$ + liability$ = asset$, you want to show that for every increase in assets, there is a corresponding increase in either liabilities (such as a business loan to the owner) or a change in equity (which roughly represents the value of the owner's ownership).

You shouldn't have any problems if you set up a separate "company" for your personal books, then treat money that goes from one to the other as equity transfers or loans.

Another question you might want to ask your accountant or tax preparer: How do you (the owner) take money out of the business. There are advantages and disadvantages to paying yourself a salary or taking draws. While the decision is not earth-shattering in its importance, it is a good idea to be clear in your own mind, and in your books, as to how you take money out of the business.

Hope this helps, even if it is a bit long,

Roy

retsaef
04-03-2003, 01:15 PM
I guess your problem is not an accounting one. Its a matter of privacy in an audit. I think the only way to avoid that would be to keep your private checking account in a separate file.